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Big Seattle charity uses accounting magic to look better

“At United Way of King County, 97 cents of every donated dollar goes to meet community needs.” This statement is prominently displayed on the website of the country’s largest United Way unit by gifts received. The claim of sky-high financial efficiency presumably is intended to impress donors in the increasing heated competition for charitable contributions.

It looks good. Too good, to my practiced eye as a journalist New To Seattle who has written about charities for a long time.

As I read the UWKC audited financial statement–downloadable from the website–only 83% of donations received in the fiscal year ending June 30, 2011, really was spent on those “community needs.” The rest was spent on fundraising, management and overhead (which for simplicity I’ll just call overhead), or accumulated as an unspent surplus for future use.

How did my 83% become the UWKC’s 97% (or even higher, as you will see)? I’d say largely thanks to a little accounting magic. In its calculations, UWKC simply ignored the 10 cents or so of every donated dollar that went unspent and therefore met no “community needs.” Then this: UWKC received $5.6 million of incoming money from a separate Bill and Melinda Gates Foundation-established endowment earmarked for UWKC. But instead of including the $5.6 million as a donation, or even as investment income, UWKC just subtracted the money from its overhead costs before calculating the charitable commitment ratio. The ploy made the donations look a little lower–but the “bad” expenses a lot lower and the efficiency ratio a lot higher.

Such netting can be the province of dubious charities. Ten days ago I wrote here about one of them, Cancer Fund of America, soliciting in Seattle and laundering much of its outrageously high overhead through a little-noticed affiliate using a similar netting procedure.

Now, I don’t think UWKC is a dubious charity at all. It funds good works and good deeds, is run by respectable people and certainly does not have outrageously high overhead. Moreover, the accounting treatment is clearly spelled out in the financial statement–if you know what you’re looking at and read far enough.

But to me it’s still questionable how UWKC presents its financial efficiency to the Seattle public. And I may not be alone in this thinking. It’s my understand there’s been a buzz about this for years among some Seattle-area charity watchdogs. The calculation was attached to the end of the financial statement as “supplemental information” and only after UWKC auditor Moss Adams LLP wrote this, “Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion or other forms of assurance on it.”

I think that’s accountant talk for, “You’re on your own, buddy.”

Anyway, using round figures, I’m going to detail how I assessed the numbers and then how UWKC did the same. You be the judge. Feel free to add your comment below the story.

According to the financial statement, UWKC received $106 million in cash donations from the public, $5.6 million from the Gates fund and another $12 million in grants, corporate sponsorships and donated labor. Less an allowance for uncollectible pledges and grants, total donations coming in were $121 million. With another $2 million in income from non-charitable sources, total revenue was $123 million.

On the expense side, $69 million went out immediately to other charities designated by donors. UWKC spent another $32 million in making its own donations and running its own programs. So that’s a total of $101 million in program support expense, as expenditures in direct furtherance of the charitable mission are called. Another $9 million was spent on overhead, including fundraising and management. Thus, total expenses were $110 million.

Simple subtraction–$123 million minus $110 million–shows an unspent surplus for the year of $13 million. That number actually appears on the financial statement as “change in net assets.”

Now, the charitable commitment ratio–the efficiency measure of those “community needs” in UWKC parlance–is usually defined as program support expense as a percent of total expense. That’s how it’s done on the charities website of the Washington State Secretary of State. But it also can be calculated as a percent of “every donated dollar”–again, UWKC’s very own words.

But when I do the easy math–$101 million/$121 million–I get 83%. Calculating charitable commitment using total expenses as the denominator rather than donations–$101 million/$110 million–I get a much higher 92%. The difference is due in effect to exclusion from the denominator of the $13 million surplus.

But either ratio is a lot less than the ballyhooed 97%. So how did UWKC reach its number?

On the financial statement, UWKC listed its overhead as $9.5 million. But that’s not the number it used to calculate its own efficiency. Not by a long shot.

First, it took off $500,000 in depreciation expense, as if equipment used in fundraising, management and overhead doesn’t wear out. The bad expenses fell to $9 million. Second, UWKC deducted $1.5 million in donated labor and expenses attributed to overhead it said was covered by that $12 million pot of grants, corporate sponsorships and donated labor. Down to $7.5 million.

Finally, UWKC subtracted the $5.6 million in Gates money. That lowered the overhead number to $1.95 million (remember, we’ve been rounding).

On the revenue side UWKC considered as donations received only the $106 million in cash that came in from the public, and not the $5.6 million from Gates or the $12 million in grants, corporate sponsorships and donated labor. UWKC also didn’t take into account the $13 million surplus, which donors who like their charities poor might want to know about.

So as UWKC saw it, all but $1.95 million of that $106 million, or $104.05 million, went to meet “community needs.” Using the formula $1.95 million/$106 million, UWKC calculated what it calls its “net operating ratio” at just 1.8%, which, subtracted from 100%, put its “community needs” efforts at 98.2%. (That’s even higher than the 97% flogged elsewhere on the Website, which seems to be the result of the prior fiscal year.)

To my mind, promoting 97% or 98% is just so out there. Here is some perspective using data published by Forbes employing a slightly different methodology. Among all 1,200 United Way affiliates (including UWKC), the average charitable commitment ratio using private donations in the denominator was 93%. Using total expenses in the denominator, the figure was 85%.

The Gates involvement dates back to a 2000 gift of $30 million by the Gates Foundation, augmented over the next decade by a matching grant program that likely brought in another $50 million. The money all went not to UWKC but to a fund set up at the Seattle Foundation called the United Way of King County Administrative Endowment Fund. Its stated purpose is to assist UWKC with “operational expenses.”

The Seattle Foundation, which oversees scores of such funds, is a separate entity not legally obliged to pay UWKC all of the Gates fund’s investment income. So UWKC got an accounting opinion that it could leave the Gates assets–now $144 million, nearly three times those of UWKC–off its own balance sheet. That made UWKC look a lot more needy; with the Gates stash, its net assets would nearly quadruple from $51 million to $195 million. The move also made it easier for UWKC to exclude the annual Gates bounty from recorded donations while using it to lower stated overhead.

On July 22, 2o11, UWKC issued a press release proudly stating that for the fiscal year just ended it had an “annual fundraising total” of $119.6 million. It also cited that 97% efficiency. In my opinion, the public use of $119.6 million then makes it even harder now to move part of it around in an effort to wipe out most of the “bad” expenses. The financial statement with its efficiency calculation came out several months later.

If UWKC’s take on things seems a bit contrived, don’t say you weren’t warned. The agency acknowledged in that financial statement “supplemental information” that calculation of its overhead ratio used a methodology “specifically defined by the Organization for this purpose.”

And on the very last page–that’s page 28–UWKC conceded that using the “United Way Worldwide Method” for calculating overhead ratio, its efficiency ratio (apparently for the prior fiscal period, but these things don’t change much from year to year) was 91.5%.